When you have a credit card, people often advise not to use up all the money available on it. This is because of something called the 'credit utilization ratio.' This ratio compares how much you've spent on your credit card to how much credit you have available. If you've used up a lot of your credit, it can lower your credit score. So, it's important to keep your spending lower than your credit limit to maintain a good credit score.
It's best to keep your credit utilization ratio (CUR) at 50% or lower. If you're finding it hard to do that, here are some simple ways to help:
Keep Track of Your Expenses
To avoid using up all your credit limit, just keep an eye on how much you're charging to each of your credit cards. Make it a habit to check your credit card account regularly to see how much you've spent. If you notice you're getting close to maxing out, consider pausing on new purchases or using a debit card instead. It's all about staying aware of your spending and adjusting if needed.
Do not Close Unused Credit Cards
Even if you're not using a credit card anymore, it's usually a good idea not to close it. Leaving the credit card idle can actually help lower your overall credit utilization rate, which is good for your credit score. Closing an old credit card can shorten the length of your credit history, which might lower your score. Keeping your credit utilization ratio low across all your credit cards is key to improving your credit score. With a better credit score, you'll have more options for loans and credit cards, and you may even be able to negotiate better interest rates in the future. It's all about managing your credit wisely to build a strong financial foundation.
Decrease Your Spending
To decrease your credit utilization ratio, you can start by spending less on your credit cards. If you're regularly making large purchases on your credit card, it can be tough to bring down your utilization rate. Try using your debit card for some expenses instead. You could also spread your spending across multiple credit cards to keep the utilization rate on each card reasonable. By reducing your credit card expenses, you'll be on your way to improving your credit utilization ratio.
Pay off any Outstanding Balances
If you're carrying a balance on your credit card from previous billing cycles, it's important to focus on paying that off first. This will help lower your credit utilization ratio, which is good for your credit score. If you're struggling to pay off the entire balance at once, you might consider taking out a personal loan to consolidate your debt. Paying off a large balance will free up more credit on your card, but it might take some time for this to reflect on your credit report. After paying off your balances, give it a month or two before making any big purchases on your card. This gives your credit report time to update and helps ensure you're starting with a clean slate.
Increase your Credit Limit
You can also try reducing your credit utilization ratio by requesting a credit limit increase on your existing credit cards. Some banks offer this option through their net banking portal, allowing you to request a higher limit online. Keep in mind that the decision to increase your limit rests with the bank, and they may conduct a hard inquiry on your credit profile when you make the request. While this inquiry might temporarily lower your score, it should bounce back once the increase is approved. Another option is to apply for a new credit card, which can increase your total credit limit. If you're mainly seeking to boost your limit, consider applying for a card with no annual fee. Just like with a limit increase request, this might also lead to a hard inquiry, but if approved, it can be beneficial for your credit score in the long run.
FAQs on Credit Utilization Ratio
What is a credit utilization ratio?
The credit utilization ratio is the percentage of a borrower's total available revolving credit that is being used. It's a crucial factor in determining your credit score
What is the ideal credit utilisation ratio which I should keep?
It's best to keep your credit utilization ratio as low as you can. This means spending less of your available credit. The recommended ratio is less than 30%. Keeping it low like this helps keep your credit score healthy.
Is the credit utilisation ratio calculated for each credit account or all of them in total?
Your credit utilization ratio is figured out by looking at the total amount of debt you owe across all your revolving credit accounts, like credit cards, and comparing it to the total credit limit available to you.
How can I keep my credit utilisation ratio at the lowest?
- Make several payments throughout the month.
- Pay off bills as soon as you can after making purchases.
- Use multiple credit cards.
- Keep your credit accounts open.
- Request a higher credit limit when possible.
My credit utilisation is over 70%. Is that bad for my credit score?
Having a high credit utilization can harm your credit score. Ideally, aim to keep your credit utilization below 30% of your total credit limit. If keeping it below 30% isn't feasible, try to keep it under 50% to minimize the negative impact on your score.
What will happen if I use more than the credit limit that I have on my credit card?
If you exceed your credit card's limit, you may face penalties according to the issuer's terms and conditions.